IRS Letter 227: Understanding the next phase of the ACA penalty process

Last November, the IRS began sending out Letter 226-J to applicable large employers (ALE) that were subject to employer shared responsibility penalties (ESRP) for their 2015 Affordable Care Act (ACA) filings. Letter 226-J does give employers the opportunity to refute the assessed penalty amount using Form 14764, and many are taking advantage of this opportunity.

This has been an ongoing and confusing process for employers, and now a new step in the penalty process has been added—IRS Letter 227, which is related to the employer’s initial response. Letter 227 is sent by the IRS to either close an employer’s penalty inquiry or provide next steps to the employer.

There are five versions of Letter 227, which are outlined below:

Letter 227-Jacknowledges receipt of the signed agreement Form 14764, ESRP Response, and that the ESRP will be assessed. After issuance of this letter, the case will be closed. No response is required.

Letter 227-Kacknowledges receipt of the information provided (such as health plan documents, offers of coverage forms, waivers of coverage forms, affordability calculations, and employee tracking data) and shows the ESRP has been reduced to zero. After issuance of this letter, the case will be closed. No response from the ALE is required.

Letter 227-Lacknowledges receipt of the information provided and shows the ESRP has been revised. The letter includes an updated Form 14765 (Premium Tax Credit [PTC] Listing) and revised calculation table. The ALE can agree or request a meeting with the case manager and/or Appeals.

Letter 227-Macknowledges receipt of information provided and shows that the ESRP did not change from the amount issued in Letter 226-J. The letter provides an updated Form 14765 (PTC Listing) and revised calculation table. The ALE can agree or request a meeting with the case manager and/or Appeals.

Letter 227-Nacknowledges the decision reached in Appeals and shows the ESRP based on the Appeals review. After issuance of this letter, the case will be closed. No response from the ALE is required.

Most employers that have refuted the penalty assessment are hoping to receive Letter 227-K or 227-L, which indicates the penalty has been reduced to zero or reduced from the initial amount. Letter 227-J closes the case and acknowledges payment by the employer. Letter 227-M essentially means the employer failed to refute the penalty assessment and therefore the full penalty is still being assessed. Letter 227-N lays out the appellate decision related to the case.

No matter what version of the letter the employer receives, it lays out the final step(s) of the IRS penalty assessment for the corresponding reporting year. Any employer that receives Letter 227 should read the letter carefully and follow its instructions. While many employers have found the process to be arduous and confusing, they’ll likely be happy to see there’s an end to the penalty process.

However, it’s important to remember that these letters will continue to be distributed by the IRS for 2016 filings and beyond. Employers should take the time now to ensure accuracy of reporting data and that they’re maintaining auditable records. This is the best way for employers to keep the business in compliance and create a trail of information in case a letter from the IRS lands in their mailbox.